Private Lending Research Articles

Shadow banking, macroprudential regulation and redistributional effects*

ABSTRACT This paper studies the implications of increasing the size of the shadow banking sector for economic activity, financial stability, and welfare. I consider a DSGE model in which lending can come from two different sources; a formal bank or private lending. Banking regulation, in the form of capital requirements, only applies to the formal banking sector. Private lenders represent the shadow banking system. Results show that an increase in shadow banking leads to a higher amount of credit in the economy, which in turn implies higher consumption by borrowers. However, after a certain threshold, a large proportion of shadow banking is welfare decreasing. Moreover, the presence of an unregulated banking sector can lead to unintended effects of macroprudential policy. That is, stricter regulation in the traditional banking sector by the authorities may result in an increase in credit flows to those banks with lower regulatory levels, especially when this regulation comes from borrower-based instruments. Thus, macroprudential authorities should take into account these redistributional effects of shadow banking when considering their regulatory perimeter.

Exploration of Deep-Learning-Based Approaches for False Fact Identification in Social Judicial Systems

With the many applications of artificial intelligence (AI) in social judicial systems, false fact identification becomes a challenging issue when the system is expected to be more autonomous and intelligent in assisting a judicial review. In particular, private lending disputes often involve false facts that are intentionally concealed and manipulated due to unique and dynamic relationships and their nonconfrontational nature in the judicial system. In this article, we investigate deep learning techniques to identify false facts in loan cases for the purpose of reducing the judicial workload. Specifically, we adapt deep-learning-based natural language processing techniques to a dataset over 100 real-world judicial rules spanning four courts of different levels in China. The BERT (bidirectional encoder representations from transformers)-based classifier and T5 text generation models were trained to classify false litigation claims semantically. The experimental results demonstrate that T5 has a robust learning capability with a small number of legal text samples, outperforms BERT in identifying falsified facts, and provides explainable decisions to judges. This research shows that deep-learning-based false fact identification approaches provide promising solutions for addressing concealed information and manipulation in private lending lawsuits. This highlights the feasibility of deep learning to strengthen fact-finding and reduce labor costs in the judicial field.

Does government spending cointegrate with bank lending? Evidence from Eurozone panel data

PurposeOur purpose is the examination of the effects of fiscal policy on private lending for the Eurozone countries. The emphasis is on the identification of the time path of government spending and bank lending.Design/methodology/approachFiscal policy is a main factor of macroeconomic stability for the euro area economy. This paper, investigates the impact of government spending on bank lending. For this reason, we present a dynamic theoretical model with a perfectly competitive banking sector, estimated using panel cointegration for the Eurozone countries from 2000Q1 to 2022Q2.FindingsOur findings highlight that, in the long run, consistent management of government spending can have a beneficial multiplicative impact on bank lending for housing and business reasons. This finding is stronger in magnitude for business versus housing lending. The high level of homogeneity of our results across Eurozone countries has positive implications for a common fiscal policy in the future. Finally, authorities should know that policy adjustments are quicker in housing lending when compared to business lending.Originality/valueIn this paper, we contribute to the existing literature, concentrating on the investigation of any existence of long-run and short-run relationships between government spending and bank lending. Additionally, our analysis allows one to investigate the contribution of each Eurozone member state in the short-run and long-run model’s dynamics, providing significant outcomes for the implementation of economic policy and the need for fiscal discipline in the Eurozone.

Factors Limiting Credit Uptake among the Youth in Kenya

Purpose: This study explores the factors limiting credit uptake among Kenyan youth, a demographic comprising about 75% of the country's population yet facing high unemployment and barriers in accessing credit to start businesses.
 Methodology: The study employed a qualitative design using semi-structured interviews with 20 Kenyan youth entrepreneurs (ages 18-35) who sought credit, and four focus groups with 6-8 diverse participants. Purposive sampling recruited participants who pursued credit within the past two years. Thematic analysis identified themes from the inductively coded interview and focus group data. Ethical protocols were followed. Validity and reliability were enhanced through triangulation, member checking, maintaining an audit trail, and strategies to minimize bias.
 Findings: The inadequate funding by easily accessible credit services such as the Hustler Fund is one of the notable impediments hindering the youth from starting small-scale business enterprises. Other barriers include stringent borrower age, business operational lifespan, and employability and minimum wage limit eligibility criteria.
 Unique Contribution to Theory, Practice and Policy: The study recommends government partnerships with private lenders, relaxed eligibility criteria for youth, credit guarantees or collateral support, expansion of low-risk credit products, and initiatives to build youth's banking histories. These recommendations integrate theoretical perspectives on financial literacy, social influences, and individual or systemic factors shaping credit behaviors. The study contributes to practice by proposing context-specific interventions tailored to Kenyan youth. Policy-wise, it aims to empower this valuable economic resource by improving credit access and harnessing their entrepreneurial potential.

Indispensable Source of Risk Contagion With Big Data Analysis From a More Comprehensive View on Shadow Banking

Although shadow banking widely exists in the financial systems of various countries, their definitions vary significantly due to specific economic and financial characteristics. This paper classifies Chinese shadow banking into six categories: securities, trust, private lending, banking, fund, and insurance. The AR-GARCH-DCC model is used to measure systemic risk spillover through from an industrial and institutional perspective. The network topology index is employed to analyze risk contagion and further explore influencing factors. Firstly, based on the results of the AR-GARCH-DCC, the estimated dynamic volatility (σ) indicates that shadow banking risk spillover is time-varying, especially in trust and securities. Second, according to the static risk spillover analysis, various institutions play different roles and can transform between risk spillovers and overflowers. Thirdly, eigenvector centrality, leverage, assets, CPI, and macroeconomic prosperity significantly impact shadow banking systemic risk spillover.

The impact of shadow banking on nonfinancial firms listed on the Ho Chi Minh Stock Exchange (HOSE) – Evidence from Vietnam

This paper examines the effect of shadow banking activities on the performance and risk-taking of 339 Vietnamese nonfinancial firms listed on the Ho Chi Minh Stock Exchange (HOSE). Using manually gathered data on firms' shadow banking activities from 2009 to 2021, the expansion of shadow banking is found to have a negative effect on the overall financial soundness of the securities companies, in particular negatively affecting performance and increasing the risk tolerance of companies. We present empirical findings about several aspects of shadow banking activities, including entrusted loans, entrusted investments, private lending, leasing, and commercial credit in this study. While the majority of shadow banking operations could have a negative impact on a firm's performance, we have discovered that commercial credit grants were crucial in reducing the COVID-19 pandemic's adverse effects on businesses, highlighting the need for financial stability in times of crisis. According to our results, the risk of shadow banking activities, which have consequences for policymakers and caution for nonfinancial enterprises, must be taken into consideration.

Institutional investors in the Portuguese credit market (1550–1800): The case of the Misericórdias

AbstractThis article questions the drivers behind the distribution of savings in different capital markets in Portugal between 1550 and 1800. A novel dataset of credit transactions, interest rates and debt service documents a shift in the lenders' investment behaviour. By 1712, one of the leading institutional creditors—the Misericórdias—had ceased to allocate funds to the sovereign debt market. Data reveal that this disinvestment was neither related to the poor performance of debt service nor to the lure of potentially higher returns on private credit. We argue that changes in the rationales for issuing debt justify the drop in the number of institutional investors in the public credit market, and this correlates with the heavy allocation of funds into private lending.

Lender Automation and Racial Disparities in Credit Access

ABSTRACTProcess automation reduces racial disparities in credit access by enabling smaller loans, broadening banks' geographic reach, and removing human biases from decision making. We document these findings in the context of the Paycheck Protection Program (PPP), where private lenders faced no credit risk but decided which firms to serve. Black‐owned firms obtained PPP loans primarily from automated fintech lenders, especially in areas with high racial animus. After traditional banks automated their loan processing procedures, their PPP lending to Black‐owned firms increased. Our findings cannot be fully explained by racial differences in loan application behaviors, preexisting banking relationships, firm performance, or fraud rates.

Stock price volume leap principle based on investor sentiment contagion model

The rise and fall of the Chinese stock market has been the subject of many studies since its inception. However, the recurring uncertainty of the broad market and individual stocks has overturned many people’s perceptions of the financial market. This paper explores the principles of the rise and fall of individual stocks under certain conditions, starting from Samuelson’s phenomenon of backward bending of the price supply curve for oil and labour, and proposes a methodology for stock market investment based on this principle. The results of the study show that the rise of stock prices is often characterized by a rapid jump. An important factor related to this is the interest rate of private lending. The rise and fall of private lending rates affect the expected return on stock market investment funds and has an important impact on stock market investment. Therefore, in the absence of a qualitative change in the stock’s texture, the medium-term rate of increase is the key to judging the stock price’s later trend. The results of this study provide a new direction to think about when judging the short- and medium-term stock price movements.

Research on the financing problem of private lending of small and medium-sized enterprises in Yulin city

Research on the financing problem of private lending of small and medium-sized enterprises in Yulin city

Financial accessibility and crime – Empirical study based on panel data from Chinese cities

PurposeThis paper empirically investigates the relationship between financial availability and crime by measuring it across five dimensions: banking, securities, insurance, private lending and digital inclusive finance.Design/methodology/approachThe study utilizes 2011–2017 data from prefecture-level cities as a representative sample. Moreover, these findings remain robust after addressing endogeneity through the use of the historical distance between cities and the railroad network as an instrumental variable.FindingsThe findings demonstrate a significant negative relationship between financial accessibility and crime rates. Heterogeneity exists in the inhibitory effect of different types of financial accessibility on crime, with banking finance exhibiting a stronger inhibitory effect compared to private lending. Areas affected by natural disasters and infectious diseases exhibit a stronger inhibitory effect of financial accessibility on crime rates, particularly in areas with severe shocks of natural disasters and epidemics. This effect is attributed to the low financing threshold and easy access to private lending, which plays a more effective role than bank finance when people face extreme risks.Practical implicationsThere should be stricter regulations imposed on private lending markets and the introduction of more rational legislation aimed at guiding a healthy development within these markets; such measures serve as effective and complementary means for individuals from all walks of life to access credit financing.Social implicationsThe regulation of financial resources by the government should always prioritize ensuring the accessibility of financial policies to cater to the needs of the majority population.Originality/valueThis study is for the first time in an emerging economy context, the causal relationship between financial accessibility and crime. To provide a more comprehensive measure of financial accessibility in a region, this paper proposes a five-dimensional methodology.

Private Loan Disclosure Covenants and Public Management Guidance

Prior research provides little evidence about whether the information demands of private lenders affect the information environment of borrowers’ public shareholders. Using a covenant in loan contracts, lenders can require borrowers to periodically provide projected financial statements. We examine borrowers’ voluntary disclosure of prospective financial information (“management guidance”) to the public after being subject to the disclosure covenant. We find that the disclosure covenant is associated with more frequent management guidance. This relation is attributable to borrowers increasing nontraditional earnings guidance and non-earnings financial guidance. In falsification tests, we find that a covenant requiring borrowers to provide monthly historical financial information is not associated with management guidance and that the prospective financial information disclosure covenant is not associated with voluntary disclosure of nonfinancial information. Our results suggest that a firm’s contractual obligation to provide projected financial information to private lenders increases the quantity and breadth of its voluntary guidance to public shareholders.

Shared Auditors in Private Lending

We examine whether borrowers who share the same auditor with a syndicate lender (i.e., shared auditors) have improved access to the syndicate loan market. We predict and find evidence that shared auditors reduce information asymmetries between lenders and borrowers as well as between lenders in a syndicate. We also find that borrowers who share auditors with lenders obtain better price and non-price terms compared with those without. Our empirical evidence also suggests that when borrowers and lenders share auditors, syndicates are less concentrated and more diverse, consistent with the prediction that shared auditors provide informational benefits on the syndicate market. Loan facilities with shared auditors are also more likely to be renegotiated with more favorable terms for borrowers. Taken together, our findings suggest that shared auditors contribute to the efficient functioning of debt markets by reducing the information asymmetries in debt contracting. JEL Classifications: M42, M41, G32, O16

Harmonizing Liberation Philosophy: Exploring the Convergence of Marxian Economics and Shariah Banking within the Framework of the Indian Banking System

Abstract: The Indian banking system evolved from an exclusive private enterprise controlled by a few wealthy families and trusts, leaving the majority reliant on high-interest private lenders, perpetuating economic disparity. Nationalization of 21 banks under Indira Gandhi aimed to rectify this, aligning with India's constitutional goal of equitable wealth distribution. However, globalization and privatization reshaped the landscape, emphasizing profit-seeking and catering to the corporate sector and affluent classes. The marginalized rural and small business sectors suffered in this pursuit, evident in neglected rural branch postings. To address this, an ethical foundation merging Marxist economics and Shariah banking principles is proposed, seeking inclusivity and ethical grounding. Shariah principles, rooted in Islamic law, extend beyond religious boundaries, while Marxist values amplify voices of the marginalized. By combining these principles, a more inclusive, morally anchored, and holistic Indian banking system can be envisioned. The priority sector's Non-Performing Assets challenge can be addressed without jeopardizing inclusivity.

A Study on the Problems and Countermeasures of Legal Regulation of Private Lending

Private lending is widespread in China, and as a useful and necessary complement to formal finance, it is becoming increasingly important in the country's economic development process. The activity of private lending is in line with the profit-seeking nature of market players, enabling the effective use of a large amount of idle social capital, and temporarily alleviating the contradiction between the high lending threshold of formal financial institutions and the lack of timely satisfaction of the capital needs of small and medium-sized enterprises, which has contributed to the development of diversified financing methods. However, while playing its irreplaceable role, the overheated private lending market may also leave a series of sequelae to China's immature social and economic structure at any time, including the lack of supervision and management mechanisms, insufficient regulation of intermediaries, the risk of disputes and the impact on financial institutions. This paper presents a comprehensive analysis of the legal regulation dilemma of private lending in China, and discusses the path of private lending regulation from the levels of special legislation, perfecting supporting systems, and prudently handling related disputes, in order to achieve the early realization of sunlight, standardization and legalization of private lending.

A Local Housing Market in the Great Depression

AbstractHousing figures prominently during economic crises, a notable example being the Great Depression. Because housing is immobile, its market is very localized. In each city, the main agents are closely interconnected. Lenders depend on mortgaged homeowners and landlords to maintain payments; landlords rely on tenants; municipalities need all property owners to pay taxes. The Depression experiences of tenants, homeowners, and federal housing programs are well-appreciated; those of landlords and private lenders much less so. Considering the role of all agents, this case study of Hamilton, Ontario, focuses on owners and private lenders and asks who lost property, to whom, and how. Drawing on land registry and property tax records, city directories, and newspaper accounts, it documents the pattern and trajectory of defaults experienced by homeowners, landlords, and private lenders. Contemporaries and historians have used foreclosures as a measure of distress, but many borrowers defaulted voluntarily. The experience of Hamilton’s homeowners was similar to those in U.S. cities. Local landlords experienced higher rates of defaults than homeowners; private lenders foreclosed less often than lending institutions. Along with municipalities, both learned to be flexible in demanding payments. The high incidence of private mortgages, the stability of lending institutions, and the marginal role of the federal government were distinctively Canadian, but in general Hamilton’s experience is more broadly indicative.

Public environmental enforcement and private lender monitoring: Evidence from environmental covenants

This paper examines whether and how public environmental enforcement affects private lenders’ monitoring efforts and the effectiveness of such monitoring. We capture lender monitoring using environmental covenants in loan agreements. Consistent with the prediction that stringent public environmental enforcement increases lenders’ monitoring incentives, we find that in the presence of higher environmental regulatory enforcement intensity, lenders are more likely to use environmental covenants when lending to polluting borrowers and when the loans are secured by real property collateral. Moreover, consistent with the prediction that stringent public environmental enforcement facilitates lender monitoring, we find that environmental covenants are more effective in reducing borrowers’ toxic chemical releases when environmental regulatory enforcement is stronger. Taken together, our findings corroborate the importance of public environmental enforcement in inducing lenders’ monitoring efforts, as well as the joint role of public enforcement and private lender monitoring in curbing corporate pollution.

Credit default swaps, investor protection, and audit cost: international evidence

PurposeCredit Default Swap (CDS) trading alters equilibrium interactive monitoring of external corporate monitors due to a possible change in private lenders' incentive to monitor client firms. This study explores how audit fees change in response to CDS trade initiation on client firms and how this effect is moderated by investor protection.Design/methodology/approachWith 6,052 cross-country firm observations, the author conducts estimations in the systems dynamic general methods of moments framework.FindingsThe author documents that audit fees rise on average after CDS trade initiations with and/or without investor protection. Meanwhile, change in auditors' risk perception result in increased audit costs when CDS trade initiation and investor protection interact. The effect of CDS trading on audit fees remain after controlling for firm, audit, and auditor features are robust to different proxies of audit cost.Practical implicationsThe need for firms in high investor protection jurisdictions to initiate CDS trade to implement policies in order to maximize their gains from investor protection activities to lessen the overall impact of any increased audit cost that may arise. Furthermore, CDS regulation may be strategically targeted to lessen the effect of increased audit costs on firms after initiation. This would ensure that the resulting increase in audit cost may not materially impact the cash or profitability position of such firms.Originality/valueThis study is distinct from previous ones by focusing on variation in private lenders incentive to monitor after CDS trade initiation after controlling for possible monitoring by short-term creditors. Given that monitoring is not costless for private lenders and CDS trading on their borrowers causes a change in this cost structure, the author documents how auditors react to such changes in incentive to monitor.

Emprunts et prêts privés à Moscou, avant que les banques n’existent, 1702

The essay analyzes private borrowing-and-lending in early eighteenth-century Moscow. It challenges any assumption that such interactions primarily involved commercial transactions among merchants and tradespeople; rather, these activities played an important role for Muscovites of all social strata in a developing urban economy. Disparate groups of the population behaved differently from one another when they borrowed and loaned money. Similarities in social status often helped explain individuals’ choice of partners in these transactions. However, men and women also borrowed and lent money across status categories. In examining such economic transactions, the article reveals some informal (if sometimes illegal) practices characteristic of private lending and borrowing in the city of Moscow in the early eighteenth century. Thus, this detailed study of transactions in 1702 demonstrates the existence of an active money market prior to the existence of banks. It also traces some connections between these informal arrangements and more formal financial institutions that followed, with the introduction of the first bank at mid-century.

P2P Crowdfunding: An Alternative Source of Credit for Enhancing the Financial Inclusion of Small Holder Farmers

Background: Indian agriculture is considered as a major source of livelihood generation for more than 58 percent of rural households. Credit is a pivotal element both in agricultural production and marketing system. Presently, most of the marginal and small farmers solely depend on localized lending models viz., village money-lenders who lend money to farmers for short term. The ministry of agriculture estimates that to double farmers’ income, private investment in agriculture must increase to two-fold. P2P crowdfunding is gaining grip at a very fast pace and gradually becoming an attractive investment option for investors.
 Methods: This paper attempts to explore different aspects of P2P crowdfunding and its scope as an alternate source of credit for the small and marginal farmers. Based on secondary data analysis (2014-2022) from a number of research papers, RBI notifications, blogs and newspaper articles.
 Results: It is evident that the global peer to peer (P2P) lending market size was valued at $67.93 billion in 2019, and is projected to reach $558.91 billion by 2027, growing at a CAGR of 29.7% from 2020 to 2027. This type of funding option has tremendous potential to magnify agriculture capital markets by allowing agricultural firms to build value more efficiently and involve more people directly in food production. The paper distinguishes the advantages of P2P lending over traditional credit system and private lending that are predominant in agriculture. However, P2P lending has its own limitations that is also discussed. Additionally, companies as well as investors need to analyse crowdfunding options carefully as per its economic feasibility and structure so that it will lead to mutually beneficial investment relationships.